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July 16, 2012

Channel blackouts, such as the one that resulted from the recent spat between Viacom and DirecTV, have become far more common over the past three years. Consumers can thank the changing dynamics of the entertainment industry.

Media companies such as Viacom and Disney have become steadily more profitable since the gloom of the recession lifted in early 2010. But the cable and satellite providers that pay to carry their channels have seen profitability virtually stagnate as they fight one another for subscribers. The squeeze has prompted distributors such as Dish and DirecTV to revolt against higher programming costs. Consumers are caught in the crossfire. DirecTV subscribers haven't been able to view Viacom channels such as Comedy Central, MTV, Nickelodeon and VH1 since Tuesday, when the two companies failed to reach a contract agreement over content fees. The companies are still negotiating, but the channel blackout has continued through the weekend.

The industry's cost pressures mean such fights are likely to continue. "I think this is the new normal," said Barton Crockett, an analyst with Lazard Capital. "It's getting to be a little bit more of a battle between life and death for these guys." The rising number of disputes is largely the result of the stagnant market for pay TV. Simply put, there aren't many new households being formed in the sluggish economy, and those that want to pay for TV already do. Some 101 million American households subscribe to cable or satellite service. That's about 87 percent of homes, a proportion that has remained unchanged since 2009, according to Leichtman Research Group, which studies media and entertainment.

TV distributors pay media companies a few cents per channel per subscriber each month. In turn, they try to sell packages of channels for more. As costs for those channels rise, so do monthly service bills, but not always by enough to offset the increasing fees that cable and satellite providers are paying to media companies. In addition, distributors spend money on promotions to woo subscribers from competitors. As a result, some companies' expenses are rising faster than revenue. That has prompted cable and satellite service providers to fight back against cost increases, even when it means blacking out channels until they can eke out a better deal. Satellite TV companies like Dish and DirecTV are in an even tighter squeeze than cable companies because they can't make up for higher costs by providing Internet or telephone service.

DirecTV, Dish, Time Warner Cable, Cablevision and Charter cable have increased profitability over the last few years, but that's tapered off. Back in December 2009, they kept 15 cents of profit after subtracting operating expenses from every dollar of services they sold. That grew to 19 cents in September. But since then, cable and satellite companies haven't found a way to wring more profitability from their business. Meanwhile, prominent media companies that produce and bankroll the shows -- Disney, Time Warner, News Corp., Viacom, Discovery, CBS and AMC -- have kept expanding their profit share. They grew operating profits from 16 cents to 19 cents per dollar over the same period. That kept climbing to 20 cents per dollar by March.

Media companies have posted gains in part by extracting higher fees from distributors in bare-knuckle contract negotiations. Those gains have come directly at the distributors' expense. Each company is different. Disney, for instance, has assets such as theme parks that skew the analysis. But distributors are no longer enjoying a post-recession bounce. Media companies are. These diverging fortunes have coincided with a distributor revolt. In the first half of this year, 22 fee disputes involving the price of broadcast TV signals have caused channel blackouts, according to the American TV Alliance. That's up from 15 blackouts in all of 2011 and just four in 2010.

Dish Network Corp. dropped AMC Networks channels on July 1, two weeks ahead of the premiere of the final season of Breaking Bad on Sunday. DirecTV dropped more than a dozen Viacom channels on July 10. Distributors say they must hold the line on their biggest expense -- programming -- even if they risk losing customers. Amid the war of words, one thing is clear: the price of TV is going up. Associated Press

DirecTV Group, the largest U.S. satellite TV provider, said it would add the Disney Junior channel for younger children, even as the blackout of Viacom Inc.-owned channels including Nickelodeon and Nick Jr. continues for a third day. The addition of the new channel from Walt Disney Co. had been in the works for a while, said a person familiar with the matter, but was brought forward as it became clear the Viacom dispute was set to run on. "Given the unsurpassed quality of Disney Junior's family friendly programming, there's no reason to watch anything else," said DirecTV spokesman Robert Mercer in an emailed statement.

Twenty-five Viacom-owned channels -- including MTV, BET, Comedy Central and Nickelodeon -- have been off air for DirecTV's 20 million subscribers since midnight on Wednesday due to a programming fee contract dispute. Both companies said talks are ongoing. Disney started rolling out the Disney Junior channel with major distributors this year including Comcast Corp and Time Warner Cable Inc as it goes after the lucrative market segment for 2-to-7-year-olds, which has been dominated by the Nickelodeon channels. Disney said the new channel is now available in 55 million U.S. households. Reuters